We recently maintained our Neutral recommendation on
Laboratory Corporation of America Holdings
), the second largest independent clinical laboratory company in
the U.S., with a target price of $88.00.
LabCorp's third quarter 2012 net earnings came in at $148
million or $1.53 per share, higher than $134.3 million or $1.31
per share in the year-ago period. However, after taking into
account amortization, restructuring and other special charges,
adjusted earnings of $1.76 per share in the reported quarter
surpassed the Zacks Consensus Estimate by a couple of cents, and
was also higher than the adjusted earnings of $1.61 in the third
quarter of 2011.
Difficult economic scenario continued to adversely affect
LabCorp. Revenues increased 1.1% year over year to $1,419.4
million, but were way below the Zacks Consensus Estimate of
$1,440 million. Although the company reported a year-over-year
increase of 3.1% in volume during the reported quarter, organic
volume growth was a mere 0.5%.
This low growth rate was primarily due to a challenging volume
environment for testing laboratories and utilization weaknesses
across the healthcare sector. Low level of employment and slow
growth of commercially insured lives will continue to affect the
company's overall growth until the economy rebounds. This is
reflected by the disappointing performance in the quarter that
led the company to reduce the upper end of its growth outlook for
2012 to 2.5% (previous guidance of 2−3% revenue growth) resulting
in adjusted earnings of $6.88−$6.93 ($6.80−$7.00) in the said
fiscal. In addition, guidance for operating cash flow and capital
expenditure were lowered to $915 million ($950 million) and $145
million ($155 million), respectively.
However, we are encouraged with the strong portfolio of
LabCorp to drive growth. The company is also working to expand
its portfolio in the new swab family of tests that allows
performing various women's health tests from a single-collection
swab. In August, the company finished and published a clinical
study for the development and validation of a PCR Assay for the
diagnosis of Bacterial Vaginosis.
This Bacterial Vaginosis test is currently available as part
of the NuSwab series of tests. Besides, in the same month,
LabCorp seconded the Centers for Disease Control and Prevention
(CDC)for revisingthe hepatitis C virus(HCV) testing guidelines
that suggested (HCV) testing in all people born between 1945 and
LabCorp recorded approximately 40% of total revenues during
the last reported quarter from the genomic, esoteric and anatomic
pathology categories, which is expected to go up to 45% over the
next 3−5 years. The esoteric volume during the quarter increased
2.2% on the back of decent growth in specialized endocrinology
and coagulation businesses, cardiovascular and chronic kidney
disease programs.Given the continuous focus on portfolio
expansion, we are confident about the company garnering higher
revenues from specialized testing, going forward.
Moreover, LabCorp is also paying due attention to strategic
acquisitions to grow further, The recent being the acquisition of
Medtox Scientific that will help strengthen the company's
foothold in specialized toxicology testing. Some of the other
recent acquisitions include Orchid Cellmark, DCL in Indiana,
Westcliff Medical Laboratories in California, where LabCorp has
limited presence, and Genzyme Genetics in the area of esoteric
testing and personalized medicine business. We are also
encouraged with the company's stable liquidity position to
successfully complete large acquisitions. LabCorp's efforts to
reward shareholders through share buybacks also encourage us.
However, LabCorp faces intense competition from its major
), and other commercial laboratories and hospitals.LabCorp is
also exposed to the reduction in clinical and physician lab fee
schedule, effective January 2013. LabCorp carries a Zacks #4 Rank
(Sell) in the short term.
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